Sections of the Enbridge Line 3 pipeline are seen on the construction site on the White Earth Nation Reservation near Wauburn, Minnesota, on June 5, 2021.KEREM YUCEL/Getty Images
We’re finally seeing significant upward movement in the pipeline sector after two years in the doldrums.
Enbridge ENB-T, TC Energy TRP-T and Pembina Pipeline PPL-T are all trading near 52-week highs, thanks to good financial results and an improving interest-rate environment.
Because these are capital-intensive companies, they are highly interest-rate-sensitive. All were hit hard by the rapid rise in rates in 2022-23 as central banks fought to tame high inflation. But now it’s a new ball game. The Bank of Canada has already cut twice, and the U.S. Federal Reserve Board is widely expected to cut at its September meeting now that U.S. inflation has fallen to 2.9 per cent.
Unless there is a recession, rates won’t fall as quickly as they rose and are unlikely to settle anywhere near the lows we saw back in 2020-21. But any downward shift is positive for pipeline stocks and other rate-sensitive securities such as utilities and REITs.
Here are updates to our past pipeline picks.
Enbridge Ltd. (ENB-T)
Originally recommended on Aug. 22, 1999, at $8 (split-adjusted). Closed Friday at $52.98.
Background: Enbridge Inc. is one of the largest energy infrastructure companies in North America. It operates an extensive network of crude oil, liquids and natural gas pipelines and is also involved in regulated natural gas distribution utilities and renewable power generation.
Performance: After a dip in April, shares have been moving higher and recently touched a 52-week high of $54.49.
Recent developments: The company reported a strong second quarter, beating consensus estimates for distributable cash flow (DCF) and adjusted EBITDA.
Earnings attributable to shareholders came in at $1.8-billion, the same as in 2023. But on a per-share basis, they dropped a nickel to 86 cents because of the issuing of new common shares. Adjusted earnings decreased by $132-million, or 10 cents a share, compared with the same period in 2023. This was primarily the result of higher financing costs because of rising interest rates and long-term debt principal.
Distributable cash flow was $2.9-billion, up from $2.8-billion in the same period last year. Adjusted EBITDA was $4.3-billion, compared with just over $4-billion a year ago.
Dividend: The stock pays a quarterly dividend of 91.5 cents a share ($3.68 a year) to yield 6.9 per cent at the current price.
Outlook: The company recast its 2024 financial guidance. Adjusted EBITDA is expected to be between $17.7-billion and $18.3-billion (previously $16.6-billion to $17.2-billion). This adds incremental contributions from the two U.S. gas acquisitions that have closed and assumes a Q3 closing for the third.
The DCF-per-share guidance range of $5.40 to $5.80 is maintained.
Action now: Buy.
TC Energy Corp. (TRP-T)
Originally recommended on April 23, 2006, at $34.07. Closed Friday at $60.76.
Background: TC Energy is one of North America’s major pipeline companies, with 93,300 kilometres of natural gas pipelines and 4,900 kilometres of oil pipelines. It also owns or has interests in seven power-generation facilities with combined capacity of approximately 4,300 megawatts.
Performance: The stock has been climbing steadily since early July, having gained more than 17 per cent in that period.
Recent developments: The company beat estimates by posting second-quarter earnings attributable to common shareholders of $963-million (93 cents a share), compared with $250-million (24 cents a share) last year. For the first six months of the fiscal year, net income was $2.2-billion ($2.09 a share) compared with $1.6-billion ($1.53 a share) in 2023. Comparable EBITDA for the quarter was $2.7-billion, compared with $2.5-billion the year before.
Spinoff and divestitures: Shareholders have approved a plan to spin off the company’s liquids pipelines business into a separate, publicly traded corporation. More details on the terms of the arrangement are expected soon.
TRP also announced approximately $2.6-billion of divestitures as part of its $3-billion asset divestiture program. It included Canada’s largest Indigenous equity ownership agreement that will see Indigenous communities acquire a 5.34-per-cent minority interest in Nova Gas Transmission Ltd. and Foothills natural gas pipeline systems for gross proceeds of $1-billion.
Dividend: The stock pays 96 cents a quarter ($3.84 a year) to yield 6.3 per cent at the current price.
Outlook: The company reaffirmed its projections for the year. Comparable EBITDA is expected to be $11.2-billion to $11.5-billion. Comparable earnings per share are expected to be lower than in 2023 because of the net impact of higher net income attributable to non-controlling interests. Capital expenditures are anticipated to be at the low end of the $8.0-billion to $8.5-billion range.
Action now: Buy.
Pembina Pipeline Corp. (PPL-T)
Originally recommended on June 24, 2009, at $14.78. Closed Friday at $52.53.
Background: The Calgary-based company owns pipelines that transport hydrocarbon liquids and natural gas products produced primarily in Western Canada. It also owns gas gathering and processing facilities and an oil and natural gas liquids infrastructure and logistics business.
Performance: The stock is up about 15 per cent year-to-date.
Recent developments: The company had a record second quarter. Quarterly earnings were $479-million (75 cents a share), quarterly adjusted EBITDA was $1.1-billion, and quarterly adjusted cash flow from operating activities was $837-million ($1.44 a share).
Revenue was $1.9-billion, up from $1.4-billion last year. First-half revenue was $3.4-billion, compared with just over $3-billion in 2023. Good numbers all around.
Acquisition: On April 1, Pembina closed the $3.1-billion acquisition of additional interests in the Alliance pipeline and Aux Sable gas processing facility. After the second quarter, Pembina acquired the remaining 14.6-per-cent interest in Aux Sable’s U.S. operations and has now fully consolidated ownership of all Aux Sable assets.
Dividend: The quarterly dividend is 69 cents a share ($2.76 a year) to yield 5.25 per cent.
Outlook: Pembina raised its adjusted EBITDA guidance range to $4.20-billion to $4.35-billion (previously $4.05-billion to $4.30-billion).
Action now: Buy.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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